Part One – A History of a Scheme in Crisis

The question of fraud and its effects on the economy was raised in the recent budget speech by the Chancellor of the Exchequer who announced the setting up of a working party headed by Lord Grabiner into the effects and extent of the Black Economy.

Without a doubt the question of benefit fraud has been vexing both Government and the Department of Social Security since the early 1990s. Frank Field, then chair of the Social Security Select Committee reported that fraud within the benefits system was running out of control. This report resulted in the Social Security Administration (Fraud) Act 1997, which gave powers to local authority benefit inspectors(1). The act also introduced the new indictable criminal offence of intentionally defrauding benefits system(2) and the reportable offence of failing to report a change in circumstance(3). The Act provided for penalties as an alternative to prosecution where appropriate. In order to raise standards the Act introduced the Benefit Fraud Inspectorate to inspect Councils and the DSS next step agencies (The Benefits Agency, Child Support Agency etc)

The Department introduced the Weekly Benefit Saving Scheme (WBS)(4) in 1993. At that time it was clear that levels of fraud were rising in the benefits system. The government’s approach from the mid 80’s had been to consider that fraud as an acceptable risk and the introduction in 1988 of the Housing Benefit scheme to be administered by Local Councils did not carry any incentives to detect or prevent fraud. In fact, any council that did detect fraud was penalised—claimant error attracted only 25% rent allowance subsidy(5).

To complicate matters, there were problems with National Insurance Numbers (NINos) and the administration of this key element of welfare benefits as 1984 and 1994 nearly 20 million more NINos were issued than there were people in the UK.

WBS was introduced in 1993 in order to encourage councils to combat fraud in Housing Benefit/Council Tax Benefit. The scheme was based on a system of monitoring for the Benefits Agency. It was designed with both carrot and stick aspects. The stick was a baseline. Failure to achieve that baseline would result in subsidy penalty. Some councils felt that it was politically acceptable not to investigate benefit fraud and to accept the penalty. However, in the heady days of rate capping this position was soon abandoned.

The carrot was that councils could make money from the scheme in two areas. The first was that any WBS above the baseline attracted a 25% reward and the overpayment if designated fraudulent would attract 95% for non- HRA and 100% for HRA subsidy and you could still recover the full amount. Later these elements were either enhanced or decreased.

This scheme proved successful. In 1994 there were 200 council fraud investigators in the country. By 1997 there were 2,000(6) and councils were regularly achieving 200-400% over their baselines(7)-.

During early 1997 the National Audit Office (NAO) and the Audit Commission published a joint survey on Housing Benefit fraud for the Public Accounts Committee (PAC). The conclusions of PAC was that the Department had not shown enough leadership or support for councils. The report also suggested that WBS claimed by some councils while not actually fraudulent in themselves, could be considered as sharp practice. A follow up report published early 1999 equally savaged the Department for failing to come to grips with the problem and further criticised Local Authorities for failing to operate the WBS scheme correctly.

In addition to the criticism from the NAO of the WBS scheme, there was the impact that the Benefit Fraud Inspectorate were having on the WBS claims of inspected councils. The Benefit Fraud Inspectorate was questioning the levels of WBS being identified by those councils that they were inspecting. This was raising questions on what exactly did councils have to do in order to claim WBS.

The DSS response to the problems over the weakness in the WBS system was to make changes to the Subsidy Order. The effects of this change were to have a devastating effect on WBS subsidy claims. The change slipped past the Local Government Association representatives and thus became law. To be fair to the LGA, on paper to the non-practitioner the change would not have seemed significant. But like the grass snake, its camouflaged looks were deceptive.

The Audit Commission and the external auditors started applying the changed order and WBS claims for 1997/98 were being adjusted downwards. The effect was to cause argument between district/external auditors and the councils that they were auditing. The change to the subsidy order is explained in part two, but one aspect of the arguments was concerned with the timing of subsidy orders: when do subsidy orders come into effect?

The Department was initially saying that the order, negotiated in June 1997 and laid in May 1998, was for the accounting year 1998/99. The Audit Commission were applying the order to the audit of the 1997/98 subsidy claim. Councils were saying that the order came into effect from April 1999. The debate was heated, was the order partially retrospective, retrospective, or published in advance?

Ministers intervened. They deemed that the subsidy order should come into effect for the year 1998/99 and that The Department should introduce an amendment to the order. By the time negotiations had taken place and Parliament time had been devoted over to the change it was December 1998 before it became law and an explanatory circular (F17/98) was distributed to councils. Despite introducing another element to WBS subsidy the published Circular was unclear and the changes in the rules were still to have major problems on claiming WBS.

The effects of F17/1998 are explored in WBS Part 2

(1)S110 Social Security Administration Act 1992
(2)S111a Social Security Administration Act 1992
(3)S112 Social Security Administration Act 1992
(4)The WBS element was calculated as the reduced weekly benefit multiplied by 32 (the number of weeks that a claim could stay in payment without being detected). Therefore a weekly Housing Benefit of £50pw would result in WBS of £1600. The subsidy element of this would 25% of the WBS ie £400. If the claim had been running 10 weeks then the overpayment element would be £500 of the council could claim 90% subsidy and recover the amount (ie £950) Total worth to the council if above threshold £1350 less the original payment £500 = £850 profit.
(5)Subsidy comes in many forms. First is the money paid to local authorities cover the cost of Housing Benefit (Rent Allowance) cases. The value of Housing Benefit (Rent Rebate) is recovered through a fixed amount to cover loss areas such as overpayments, and the main HB element is clawed back from the Government through the Housing Revenue account.   Council Tax Benefit is covered in a similar way to that of Rent allowance  . The second element of subsidy comes from an administration grant to cover some of the staffing and administration costs. The third subsidy comes from Weekly Benefit Savings subsidy that is to cover the cost and administration of fraud investigation. Additional subsidy is available to councils who implement the verification framework.
(6)Source LAIOG
(7)Source DSS
(8)Source Benefit Fraud Inspectorate